Press release

6 Oct 2021 London, GB

Construction sector faces further supply pressures – EY ITEM Club comments

Although a construction PMI of 52.6 in September remained in growth territory, it was down from 55.2 in August and the lowest for eight months.

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  • Although a construction PMI of 52.6 in September remained in growth territory, it was down from 55.2 in August and the lowest for eight months. Softer demand played some role in the slowdown, but supply chain pressures continued to make their presence felt.        
  • Households’ appetite to spend on home improvements, a strong housing market, and a ramping up of government infrastructure versus shortages of labour and materials mean the construction sector faces an imbalance between demand and supply for the foreseeable future, increasing inflationary pressures. But market forces and a return to more normal household spending patterns should eventually help resolve this imbalance.   

Martin Beck, senior economic advisor to the EY ITEM Club, says:

“The construction PMI fell for the fourth successive month to 52.6 in September, the lowest since February. The fall accompanied a decline in September’s manufacturing index, although a rise in the services PMI revealed a bit more momentum in the economy’s dominant sector. The decline in the construction PMI partly reflected softer demand, but as with services and manufacturing, activity was more held back by supply-side constraints.

“An imbalance between demand and supply in the sector is unlikely to be resolved quickly, but the outlook for construction demand remains healthy. Structural factors, such as higher demand for larger, out-of-town properties and retail-to-residential conversions in cities, will support new home building. In addition, maintenance and repair activity will gain from the strength of households’ appetite for home improvements and the need to retrofit buildings to meet the Government’s net zero ambitions. The higher levels of public sector investment planned for the next few years will further boost activity.

“But supply-side shortages and bottlenecks will make meeting this demand challenging. It therefore looks like inflationary pressure in the construction sector will add to the upward pressure on prices seen in other parts of the economy – September saw rates charged for sub-contracted work increasing at a survey-record pace, for example.

“But supply problems and associated inflationary pressures should eventually be resolved, to a degree. Higher wages in the construction sector should attract more people into the industry and higher costs should prompt companies to improve efficiency in a sector that for a long time has been affected by weak productivity growth. Meanwhile, a return to more normal consumer spending patterns post-pandemic – with spending on services recovering at the expense of goods – may take some pressure off demand in parts of the construction sector.”